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| 2 minutes read

Low tax is only one piece of the puzzle as North Korea shows.

Those who are the heirs of Thatcher and Reagan believe that low taxes encourage entrepreneurship by maximising the return on effort made by the individual and, have the consequence of powering the economy much more effectively than a system that has a larger tax take on the "tax and spend" model of the Nordic countries and the British post-War consensus...

But...hold on...North Korea.

The Democratic People’s Republic of Korea abolished all direct taxation in 1974 and only retains forms of indirect taxation. An ideologically designed tax system which, whilst its intellectual underpinnings may not be the same, looks similar to the Cayman Islands and Monaco taxation systems and would seem to find some echoes in the Thatcherite mantra that indirect taxation is preferable as it is, to a certain extent, the choice of the individual as to whether or not the expenditure is incurred and thus tax paid.

So, why is North Korea not a booming economy? Well, its obvious. North Korea has a legal, social and governmental framework which discourages any entrepreneurship (on pain of the "reeducation" camps). Which teaches us that tax is not everything, but one piece of broader puzzle. Low tax does not guarantee growth, it needs to work hand in glove with a system which allows free entry of all to the market, limits the burden of bureaucracy, and unfetters the business where possible.

It will be interesting to see if governments which have been forced into making systems simpler during Covid 19 will maintain that or whether older more complex regulatory systems will return.

As we start to look at how to restart our economies some governments will take the route of keeping tax as low as possible, some will tax the classical tax and spend route.

If the low tax route is to work their administrative framework should look less like North Korea and more like a free market. They should abolish unnecessary regulation and seriously consider how long it takes to establish a business in their country, they should eliminate permissions and certificates wherever possible and shrink the super-structure of governance. That way their expenditure will shrink (less civil servants) and their low tax policies will have the desired effect and not get bogged down in the mire of form filling and bureaucracy.

As an alternative the classical tax and spend route may well be ineffective as borrowing costs sky rocket and the tax burden increases over and above what can be used for economic stimulus.

These are difficult times but one thing is clear, a low tax / high bureaucracy economy like North Korea will not have the weapons at its disposal to deal with the challenges ahead.’

As part of the restructuring, in 1974, direct taxes such as income taxes were officially eliminated.

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